Amplifying Investment Potentials in Nigeria’s Power Sector

 Power PlantChineme Okafor examines the potentials of the first-ever power purchase agreement (PPA) consummated between the Nigerian Bulk Electricity Trading Company and Azura Power West Africa in the country’s emerging power sector.

The Nigerian Bulk Electricity Trading Company (NBET) has recently consummated its first-ever power purchase agreement (PPA) upon which it will assume the responsibility of an off-taker of power to be generated by Azura Power West Africa from its 450 megawatts (MW) Azura-Edo IPP Open Cycle Gas Turbine (OCGT) power station.

The project will be the first phase of a 1000MW power plant facility that is being developed near Benin City, in Edo State.

The agreement which came into being after about 18 months of detailed negotiations between NBET and Azura Power was also recently ratified by the government at the presidential power sector reform transaction signing ceremony conducted by President Goodluck Jonathan in Abuja.

For the NBET, the agreement had materialised to signify government’s intention to drive investments into Nigeria’s power sector with a verve consisting of shared responsibilities in benefits and risks.

The PPA according to the Managing Director of NBET, Rumundaka Wonodi,  has in itself become a template upon which subsequent PPAs with upcoming Independent Power Producers (IPPs) can ride on to push investments into Nigeria’s emerging electricity market all in line with Nigeria’s plan to improve her electricity generation to about 20,000MW by 2016.

“The PPA we signed with Azura Power to a large extent represents the government’s offer to doing what is to the minimum necessary to attract private investment in the sector. We have been working with Azura for the past 18 months, going through the necessary documents and processes to come to where we are.

"What we’ve been doing all that while is to try to first identify all the risks within the operations of an IPP and of course the Bulk Trader. We looked at all the risks associated with bringing a new power plant to life, financing it and then we began to put the risks in different pockets identifying where and who is capable of mitigating a particular risk; in that regard, that person will bear the risk and whatever is related to government, for instance, transmission, NGC (Nigerian Gas Company), security of lives and properties and all the things you call sovereign risks, payment of the power is all that is put and made the obligations of the Bulk Trader,” Wonodi said in his explanation of the significance of the PPA with Azura," he said.

He stated that the NBET would further leverage lessons drawn from formalising the model PPA to encourage other IPPs to cash into Nigeria’s emerging electricity market, adding that the potentials could become boundless with the right systems as being promoted by the government.

Simply put, a PPA is a long-term contract between the producer and buyer or off-taker of electricity to buy electricity generated from a particular power plant for resale and distribution to consumers through a distribution network.

It is often regarded as being critical in planning successful power project in view of its tenacity to secure long-term streams of revenue for the power project through sale of electricity generated by the project; consummating a functional PPA is often thought to be challenging considering the complex structures and processes required to ensure concrete obligations within the agreement.

Access to Finance for Greenfield IPPs

With the planned capitalisation of the NBET by about $550 million by the close of the year, it is thought that the electricity “bulk trader” will within its capacity provide a good level of payment guarantee system for power supplied within the value chain, thus, giving some sort of confidence to investors in Greenfield IPPs that electricity generated and supplied into the national grid will be duly accounted for. This sort of confidence is expected to boost investment drive within Nigeria’s power sector.

Accordingly, securing a sustainable PPA guarantees an IPP good leverage to access equity and debt financing of planned electricity generation projects. Generated electricity from the IPP is usually sold through a PPA to an investor-owned, municipal or rural electric utility within a local electric market through an off-taker which in this case is the NBET.

Typically, price terms are often thought of as the most important element of a PPA but usually, such agreements also include many vital provisions on issues such as the length or duration of agreement, commissioning processes, purchase and sale of energy, downsizing agreements, transmission issues, milestones and defaults, credit, insurance and environmental dimensions amongst some others.

Wonodi in this regard noted that the model NBET-Azura Powers PPA had got more of these peculiar provisions with strict regard to the Nigerian power sector. He however stated that risk factors and government’s responsibilities within the agreement could grow slimmer as the sector gets familiar with existing risks in the process.

“Of course, the bulk trader has rights, it has a right on a certain day to expect power to come and so if it has done all that it needs to do, we expect that the IPP will make power available after some time, so the IPP has the responsibility of raising money, constructing the power plant, entering into gas supply agreements, operating the plant, paying taxes and making sure that after a particular time, it brings power to the grid,” he said.

While explaining the content of the model PPA, Wonodi stated: “Essentially, it is risk allocation and then penalties in the form of carrots and sticks for doing what and what not. It is a very tightly negotiated agreement that will attract over $600 million of investment for 450MW plant, having done that the Azura power is a project financed project and we have a template that we believe we can now use to process and document other IPPs.

"Things might differ depending on financing structure or type of technology and we will try to accommodate the likes of IOCs who look to finance power projects based on equity without going to banks but in essence, the risk allocation will be similar to what is obtained in the Azura template, the only thing that can happen is that the government offerings can only reduce with time as the government pulls itself out and the risks become thinner going by its familiarity, except for what we regard as unquantifiable risks.”

Also, PPAs are usually legally binding once executed by representatives of both the producer and off-taker but also subject to early termination rights. NBET indicated its obligation to live up to its responsibility in securing the sanctity of PPAs.

Wonodi said: “People look at our market today and come to say that the bulk trader is coming in to fulfill the role of a credit worthy entity, when they look at the market, they say there is so much shortfall from distribution companies and if bulk trader will fulfill its role, then it will need additional capital to make up the shortfall and make payment to the generation companies.

"We see it differently at the bulk trader, the capitalisation is not to pay for the shortfalls. These people have made the promise and agreed to the cost-reflective tariff set by NERC and so we expect them to be able to collect and bring the losses to what is accounted in the tariff, once they do that, they should be able to make payments for power supplied to them. But we still need a working capital for contingency situations and so the bulk trader’s recapitalisation is to take care of all the quirks in the market and so even though there are shortfalls in payment due to these contingencies and the bulk trader is making the payments, it is our expectation that the money will be clawed back and the bulk trader’s recapitalisation is not a diminishing amount of money and while we are making that payment, it is part of the tariff and will come back in other months.

'The recapitalisation is for the gaps in when we are making payments and receiving payments because we have to make payments to generation companies to give them that confidence that is needed as our collection from the distribution companies might be at different times because they may not be able to collect at the same times.”

Often regarded as the central document in the development of independent electricity generating assets, PPAs defines revenue terms power projects and credit quality. It iis key to obtaining non-recourse project financing.

Wonodi inferred that one of the key benefits of PPAs to such Greenfield independent power projects like that of Azura Power was that it clearly defined the output of generating assets and the credit from its associated revenue streams that could be deployed to raise non-recourse financing from banks or other sources of finance.

This, he added, would drive sustainable investments in Nigeria’s power sector.

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